S&P Probed by NY Attorney General Over CMBS

New York Attorney General Eric Schneiderman is investigating Standard & Poor’s to determine whether it failed to follow its own methodology in rating commercial-mortgage bonds in order to win business from banks, Bloomberg News reported Friday, citing two people with knowledge of the matter.

The unit of McGraw Hill Financial Inc. (MHFI) is facing scrutiny on six such deals it graded in 2011, said the people, who asked not to be identified because the probe hasn’t been made public. Ed Sweeney, a spokesman for S&P in New York, declined to comment to Bloomberg, as did Matt Mittenthal, a spokesman for Schneiderman.

The New York Attorney General’s office is at least the third government agency investigating S&P’s business of grading commercial mortgage-backed securities, in which banks pool loans on properties such as shopping malls, hotels and skyscrapers to create securities that are sold to investors.

S&P said in July it received a notice from the U.S. Securities and Exchange Commission that the regulator may seek an enforcement action related to the firm’s CMBS ratings in 2011. Massachusetts Attorney General Martha Coakley is also looking into how the firm rated such securities, people familiar with the matter said last year.

The ratings firm is separately facing a $5 billion lawsuit filed by the U.S. Justice Department in February 2013, alleging that S&P and its parent inflated ratings on bonds backed by home loans made to the riskiest borrowers to win business from Wall Street banks. S&P, along with Moody’s Investors Service and Fitch Ratings, were blamed for helping trigger a financial crisis that sent the world’s largest economy into its longest recession since 1933.

After the Justice Department filed the lawsuit, S&P said it would defend itself “vigorously” against the “meritless” claims.

The SEC alleged violations related to the CMBS rankings and “public disclosure made by S&P regarding those ratings thereafter,” according to a July 23 regulatory filing. The SEC may pursue actions including a cease-and-desist order, civil money penalties or a suspension or revocation of the firm’s ratings accreditation.

In a report published late Friday, analysts at J.P. Morgan identified six private label deals they believe could be affected, four of which were sponsred by the bank itself; JPMCC 2011-C3, JPMCC 2011-C4, MSC 2011-C1, JPMCC 2011-FL1, JPMCC 2011-CCHP and WFDB 2011-BXR.

The report notes that all six transactions have at least one other of the “Big Three” rating agencies (Moody’s/S&P/Fitch), with the exception of the subordinate tranches in JPMCC 2011-C4. "One concern among investors is withdrawn ratings or downgrades, but it is too soon to see that happening," the report states. "In addition, the presence of another major rating agency is important for those investors that require ratings  or require a 'Big Three' agency."

Three years ago, S&P pulled the ratings that it had assigned to an offering from Goldman Sachs Group Inc. (GS) andCitigroup Inc. (C), prompting the banks to abandon the deal after it was placed with investors. S&P yanked the rankings because it was reviewing conflicts in how its methodology was being applied, the company said at the time.

The credit grader halted rating any new commercial-mortgage bonds, saying it had to review a potential discrepancy in its model. That August, the company said the conflict wasn’t significant and it would resume grading deals. S&P revised its criteria in 2012 and reentered the market after being frozen out for more than a year.

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